Assessing Banking and Currency Crisis Risk in Small States : An application to the Eastern Caribbean Currency Union /

To complement the early warning signals literature, we study the determinants of banking and currency crises for small states and currency boards. Building on the crisis dataset by Laeven and Valencia (2020), we estimate a binominal logit model to identify the determinants of crises, and as a case s...

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Bibliographic Details
Main Author: Pizzinelli, Carlo
Other Authors: Ishi, Kotaro, Khan, Tariq
Format: Journal
Language:English
Published: Washington, D.C. : International Monetary Fund, 2021.
Series:IMF Working Papers; Working Paper ; No. 2021/276
Subjects:
Online Access:Full text available on IMF
Description
Summary:To complement the early warning signals literature, we study the determinants of banking and currency crises for small states and currency boards. Building on the crisis dataset by Laeven and Valencia (2020), we estimate a binominal logit model to identify the determinants of crises, and as a case study, we apply our models to the Eastern Caribbean Currency Union (ECCU). Our findings largely confirm past studies' results that both external and domestic fundamentals matter in predicting crisis likelihood, but we find that small states and fixed exchange rate regimes are more sensitive to these fundamentals, compared to larger economies. Our empirical results also suggest that for currency board economies, keeping a high level of the foreign reserve cover-the "backing ratio" defined as official foreign reserves as a share of central bank demand liabilities-is critical to reduce the likelihood of both banking and currency crises. The backing ratio is particularly important during years of global economic downturn.
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Physical Description:1 online resource (34 pages)
Format:Mode of access: Internet
ISSN:1018-5941
Access:Electronic access restricted to authorized BRAC University faculty, staff and students